Draghi Tries To Free The ECB From The Grasp Of The Ratings Agencies, Forecasts Contraction With Austerity

Ratings agencies were at the center of a speech by the European Central Bank's Mario Draghi in front of the European Parliament today.

Draghi argued that the ECB doesn't "mechanically" depend on ratings decisions, but said that the bank will work towards "reduc[ing] reliance on ratings agencies." He said that the success of relaxing collateral requirements would be visible tomorrow, although it's unclear the extent to which ratings will affect this.

"There's no tradeoff between austerity and growth." He confirmed that austerity would provoke "a short-term contraction," but still suggested that it was possible for the eurozone to avoid a recession.

But Draghi's plan to leave behind ratings agencies still appears vague. He said that ratings should be one of the many inputs used to address the sustainability of a country's debt, but added, "One should also be capable of producing his own or her own internal ratings."

His statements also spelled doom for the banks in the coming year. "The whole year is going to be a difficult year for the banks," he admitted. He said the ECB wanted to avoid a "serious credit tightening."

UPDATE: Draghi says that, with the new liquidity support measures, banks could indeed purchase their own bonds or sovereign bonds with the funding they get from the ECB. That appears to be some variation of the idea investors cheered about last Friday, though perhaps not a full endorsement of, a bank-led euro bailout.

UPDATE II: A few points on the new collateral requirements for ECB lending:

Banks will be allowed to use certain loans to clients as collateral.

Collateral will be valued at market prices before a haircut is assessed to penalize riskier borrowing.

The ECB "will issue common guidelines" on collateral. We're not sure when...